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Office of Examination and Insurance Report
INTEREST RATE RISKS ON THE HORIZON

2 Chairman’s Corner
Lifting the Burden on
Community Charters

3 Board Actions

4 Board Perspectives
Safety and
Soundness –
A Ubiquitous Phrase
Common Sense
Approach is
Always Best

Earlier this year, the NCUA Board issued a
notice of proposed rulemaking (NPRM) on
interest-rate risk management at natural
person credit unions. In general, this
proposed rule would require federally
insured institutions facing serious interest-rate risk to take the same steps to manage
that exposure that bank and thrift
supervisors expect of their institutions.

6 Region I Report
Determining Safety
and Soundness –
From the Examiner’s
Perspective

Specifically, the NPRM requires all federally
insured credit unions holding more than $50
million in assets, and those holding between
$10 million and $50 million with significant
capital at risk from a rate shock, to have an
effective interest-rate risk management
program enshrined in a written policy. In an
ongoing dialogue with the industry since the
NPRM was issued, two questions have
repeatedly surfaced:

; Is such a rule still needed now that
interest rates have fallen?

; Was a rule really ever needed given the
industry’s success at working through
periods of rising rates in the 1990s
or 2000s?

In response to the first question, NCUA
acknowledges the interest-rate environment
has changed. Indeed, between January and
September, the average yield on one-year
Treasury bills tumbled from 0.27 percent to
0.10 percent. So the typical credit union—
which funds long-term fixed-rate mortgages
with short-term shares and share
certificates—has enjoyed some earnings
relief, at least on the interest-rate front.
Viewed another way, mortgages booked
earlier are still paying higher rates, while
funding costs have fallen dramatically.